Gold Back Under $1,600, Market Questions Posted by James Randolph on May 09, 2012
The gold market took an unseasonable turn this week as the spot price for gold headed back under $1,600 per troy ounce, spurring questions as to the fundamentals of the market, though concrete influences account for the move. In crossing the $1,600 level, gold breached its one year moving average and even caused some market watchers and analysts to question whether the decade-long bull market for gold has finally ended.
Calling the market in gold is generally considered a very dangerous thing to do these days, particularly after some high profile investors made incorrect calls this past autumn and winter. This is in addition to the inherent volatility of the gold market, which, like all commodities, is notorious even in good times.
There has been a very strong drop off in demand recently, both abroad and domestically. The drop off cannot entirely explain the current action in the gold market, which is fairly dramatic. While the $1,600 per troy ounce level may be more psychological than anything else, the $45 per troy ounce drop in the spot price during intraday trading is a very significant percentage and needs to be considered.
Also, the one-year moving average, a technical indicator used by frequency traders, indicates a transition in the gold market. When the spot price was above the one-year moving average, the general trend line was more toward a rising price, on average. We have now breached that level toward the downside, justly calling many questions as to how the price of gold will adjust in the future.
Though there is also an increase in gold selling at the moment, which can partially though perhaps not quantitatively account for the movement in the gold price, and an increase in buying in China as Asia again buys on the dip, the general price trend in gold appears more technical. In a decade long bull market, we’re due for a correction and a relatively major correction at that.
Long term trend lines still place gold much higher per troy ounce in the next year, but in the intermittent time we are looking to establish a comfortable low where the market will consolidate. All in all, this movement is a buying opportunity on many levels, as indicated by market veterans and overseas markets. Whether the bottom is $1,500 or a few points lower, it marks a position from which the gold market will make significant gains, particularly by early next year per projections from major banks including Goldman Sachs and JP Morgan.